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Selected Examples of Planning Strategies and Options
In order give you a sense of the types of ownership succession planning strategies and options available, we summarize a few common examples below:
Buy/Sell Agreement
If you are a co-owner of a closely held business, a major threat to preserving the long-term value of the business is the risk of ownership interests passing to unwelcome outsiders who will disrupt its smooth operation.
Consider This
A Buy/Sell Agreement (BSA) is an agreement among co-owners that addresses ownership succession and mitigates this risk by placing restrictions on transfers of ownership interests.
Another benefit of a BSA is that it can create a market for the ownership interest of a deceased or withdrawing owner where none may otherwise exist. This is accomplished by imposing a mandatory purchase obligation on the business, or remaining owners, to buy the interest at a price established under the agreement. This can be critical for helping to ensure that a withdrawing owner receives a fair price for his or her ownership interest.
Trusts for asset protection
Your ownership succession plan may involve giving ownership interests to family members, either during your lifetime or at your death. Under this scenario, once the gifted interests are in the hands of the family member, they become exposed to loss should the family member become involved in a lawsuit or an unsuccessful marriage.
You can mitigate this risk by placing the ownership interests in a properly constructed trust for the benefit of the family member instead of giving the interest outright.
Trusts that promote tax savings
Transferring your ownership interests can trigger taxes that result in loss of family wealth. This may be due to capital gains tax on a sale of your interest, or gift or estate tax on a gift or bequest of your interest to a family member.
Consider This
By strategically placing your ownership interests in certain properly designed trusts, these taxes can be significantly mitigated.
Naturally, the appropriateness of any planning strategy depends on an individual’s specific goals and circumstances, and none should be utilized without careful consideration.